Question three (25 marks) i) ii) ISA 315 Identifying and Assessing the Risks of Material Misstatement...

 

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Question three (25 marks) i) ii) ISA 315 Identifying and Assessing the Risks of Material Misstatement identifies Audit risk and business risk as the two major elements of total risk. Required: Differentiate Audit risk from business risk (5 marks) The audit firm of PWC evaluates the risk of material misstatement by disaggregating the total risk into its main components and sub components as indicated below 1) Inherent risk, 2)Control risk, 3) Detection risk 4) Operational risk,5)Finance risk and 6)Compliance risk. Required: For each of the scenarios below, select the component of risk that is most directly illustrated. The components may be used once, more than once, or not at all. Also suggest the effect on the financial statement and how the auditor might mitigate the risk (you may present your answer in the format below)(20 marks) Scenario Component of risk Effect on financial statement 1 2 the How to reduce the risk Page 3 of 5 1) A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly 2) The client's business mainly deals with Cash sales which is more susceptible to theft than credit sales 3) Confirmation of receivables by a new audit staff fails to detect a material misstatement 4) Disbursements (payouts) have occurred without proper approval 5) There is inadequate segregation of duties in the payroll section. 6) Technological developments make a major product obsolete 7) The client is very close to violating debt covenants 8) XYZ Company, a client, lacks sufficient working capital to continue operations Question three (25 marks) i) ii) ISA 315 Identifying and Assessing the Risks of Material Misstatement identifies Audit risk and business risk as the two major elements of total risk. Required: Differentiate Audit risk from business risk (5 marks) The audit firm of PWC evaluates the risk of material misstatement by disaggregating the total risk into its main components and sub components as indicated below 1) Inherent risk, 2)Control risk, 3) Detection risk 4) Operational risk,5)Finance risk and 6)Compliance risk. Required: For each of the scenarios below, select the component of risk that is most directly illustrated. The components may be used once, more than once, or not at all. Also suggest the effect on the financial statement and how the auditor might mitigate the risk (you may present your answer in the format below)(20 marks) Scenario Component of risk Effect on financial statement 1 2 the How to reduce the risk Page 3 of 5 1) A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly 2) The client's business mainly deals with Cash sales which is more susceptible to theft than credit sales 3) Confirmation of receivables by a new audit staff fails to detect a material misstatement 4) Disbursements (payouts) have occurred without proper approval 5) There is inadequate segregation of duties in the payroll section. 6) Technological developments make a major product obsolete 7) The client is very close to violating debt covenants 8) XYZ Company, a client, lacks sufficient working capital to continue operations

Answer rating: 100% (QA)

ANSWER 1 Audit risk is defined as the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated Audit risk is a function of the risks of mat... View the full answer